What is a testamentary trust?

A testamentary trust is a type of trust set up in the event of your death, created by a ‘testamentary’ instrument or document such as a will; hence the name. Testamentary trusts are set up in order to hold assets and are overseen by a nominated trustee, who eventually distribute the trust’s assets to beneficiaries. However the manner in which this can be done depends on the manner of the testamentary trust.

There are a number of different types of testamentary trusts, but two of the most common ones are:

The trustee has the discretion to distribute capital and/or income between a group of beneficiaries nominated in the will

Protective testamentary trusts, generally established for the benefit of someone who is otherwise unable to manage their own affairs.

A testamentary trust can hold a wide variety of different assets. It can be established using specified assets, a designated portion of your estate or the entire balance of your estate. You can even establish multiple trusts in the one will, which means you could have trusts with different provisions to meet the different needs of your beneficiaries.

While superannuation death benefits usually don’t form part of your estate, there are some circumstances when you may want them paid to your legal personal representative and distributed according to your will. You may even decide to create a superannuation proceeds trust, which is a special type of testamentary trust. But before you start planning how your superannuation will be handled when you pass away, you should make sure your super is currently in the right hands. You can compare super funds and find the right fund for you with Canstar.

The following table contains details of the superannuation funds rated by Canstar based on someone aged 40-49, with a super balance of $100k-$250k. This table has been sorted by one-year performance (highest to lowest)

Please note that the performance information shown in the table is for the investment option used by Canstar in rating of the superannuation product.

Why might you use a testamentary trust?

Testamentary trusts have a range of uses and benefits, but some of the main reasons people tend to use them are for tax planning and asset protection.

Using a testamentary trust for tax purposes

One potential advantage of using a testamentary trust is that they can be used to achieve certain tax outcomes. As explained by the ATO, in the case of a discretionary testamentary trust, the trustee could hypothetically choose to pay certain amounts to various beneficiaries with differing incomes, and in this way possibly minimise the tax paid on the total sum.

According to the ATO, income distributed to a child under 18 from a testamentary trust is usually taxed at adult marginal rates, rather than ‘penalty’ minor rates, which can be as high as 66 cents on the dollar on some income. Depending on the child’s other income, their income from the trust could also potentially be eligible for the low-income tax offset, which can be as much as $445.

The ATO advises that a testamentary trust itself usually does not have to pay income tax on income that is distributed to the beneficiaries, but does have to pay tax on undistributed income, usually at the highest marginal rate of 45%.

Using a testamentary trust for asset protection purposes

Another possible benefit provided by testamentary trusts is that they can protect assets against recovery from creditors. If an inheritance or superannuation death benefit is paid directly to a beneficiary, it could then potentially be susceptible to recovery or seizure by any creditors that person may have.

However, placing the death benefit (or other assets) in a testamentary trust may provide your dependents with protection against recovery due to the fact that, generally speaking, creditors can’t claim assets or income held in a trust. This may be helpful for beneficiaries who:

Are in a precarious financial situation

Work in a high-risk environment such as share-trading

Are currently dealing with divorce or a similarly fractious family issue

Ultimately you should definitely seek legal advice, as well as talk to your family and dependants before making any sort of firm plans for your estate or your superannuation. And like we said, the first step in considering where your superannuation will go when you pass away should be ensuring that you’re with the right super fund to begin with. You can compare super funds and find the right fund for you with Canstar.

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This advice is general and has not taken into account your objectives, financial situation, or needs. Consider whether this advice is right for you. Consider the product disclosure statement (PDS) before making any financial decision. For more information, read Canstar’s Financial Services and Credit Guide (FSCG).

Please note that all information about performance returns is historical. Past performance should not be relied upon as an indicator of future performance; unit prices and the value of your investment may fall as well as rise. The results are general advice only and not personal product advice.

Canstar is an information provider and in giving you product information Canstar is not making any suggestion or recommendation about a particular product. The information has been prepared without taking into account your individual investment objectives, financial circumstances or needs. Before you decide whether or not to acquire a particular financial product you should assess whether it is appropriate for you in the light of your own personal circumstances, having regard to your own objectives, financial situation and needs. You may wish to obtain financial advice from a suitably qualified adviser before making any decision to acquire a financial product. Please refer to the product disclosure statement (PDS) and Canstar’s Financial Services and Credit Guide (FSCG) for more information, and read our detailed disclosure, important notes and liability disclaimer.

The Star Ratings in this table were awarded in March 2018. The search results do not include all providers and may not compare all features relevant to you. View the Canstar Superannuation Star Ratings Methodology and Report. These results are general advice only and not personal financial advice. Ratings are only one factor to take into account when deciding whether to make an investment. Consider the Product Disclosure Statement before making a purchase decision.

Products displayed above that are not 'Sponsored' are sorted as referenced in the introductory text to the table. Canstar may receive a fee for referral of leads from these products. See How We Get Paid for further information. Products displayed above do not include all products/providers and may not include all features relevant to you. Please note that all information about performance returns is historical. Past performance should not be relied upon as an indicator of future performance; unit prices and the value of your investment may fall as well as rise. Performance information shown is for historical periods up to 30/6/2018 and investment options noted in the product information. This is indicated in the tables by a note referring the user to the product provider, or by no performance information being shown. Performance figures shown reflect net investment performance, i.e. net of investment tax, investment management fees and the maximum applicable ongoing management fees and membership fees. Performance information is provided by Rainmaker Information Pty Ltd ABN 86 095 610 996 AFSL 461816 (www.rainmaker.com.au) which provides general information on superannuation. Performance data may not be available for some products. Any advice on this page is general and has not taken into account your objectives, financial situation or needs and is not a recommendation for your particular circumstances. Consider whether this advice is right for you. Consider the product disclosure statement before making a purchase decision. You may need financial advice from a qualified adviser.

Performance, fee and other information displayed in the table has been updated from time to time since the rating date and may not reflect the products as rated. The performance and fee information shown in the table is for the investment option used by Canstar in rating of the superannuation product.

Investment returns of superannuation products: Canstar considers the annual investment returns of a product’s default investment option, including the default life-stage option where applicable. Where a product does not have a default investment option, annual returns for the investment option with the highest funds under management (FUM) and a 60-80% growth asset allocation are used.

Annual cost includes administration fees and indirect costs (including the investment fee, performance fee where applicable, and any other indirect management costs). This cost is calculated based on the super balance specified and the investment option considered in the 2018 Superannuation Star Ratings, which is the default investment option (including default life-stage options). Where a product does not have a default investment option, annual fees for the investment option with the highest FUM and a 60-80% growth asset allocation are used.

This advice is general and has not taken into account your objectives, financial situation or needs. Consider whether this advice is right for you. Consider the product disclosure statement before making a purchase decision. Canstar provides an information service. It is not a credit provider, and in giving you information about credit products Canstar is not making any suggestion or recommendation to you about a particular credit product. Statistics referenced on this page have been verified by Canstar Research. Research provided by Canstar Research AFSL and Australian Credit Licence No. 437917.